Episodes

Dan Ferris:                 Hello, and welcome to the Stansberry Investor Hour. I'm Dan Ferris. I'm the editor of Extreme Value and The Ferris Report, both published by Stansberry Research.

Corey McLaughlin:    And I'm Corey McLaughlin, editor of the Stansberry Daily Digest. Today we talk with Brian Dalton, CEO of Altius Minerals.

Dan Ferris:                 Yes, Brian is the CEO of Altius and the founder of Altius back in the mid-1990s. I've known him for many years, since about 2009 when I started writing about Altius Minerals in our Extreme Value newsletters – it's still in there. It's still in Extreme Value. And so, let's catch up with my old friend Brian Dalton. Let's do it right now.

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Brian Dalton. It's been a while. Welcome back to the show, man.

Brian Dalton:             Hey, it's great to chat with you again. Thanks for having me back.

Dan Ferris:                 Yeah. I actually – I didn't look up when the last time that you spoke with us on the show was, but and you and I, we haven't exactly seen each other certainly in years and we haven't spoken in a little while too. So, this is good catch up for me and a good time for our listeners to kinda get familiar with what you and Altius Minerals are doing. And you sent me some great material.

Brian Dalton:             It's definitely pre-COVID on last, but I'll just jump in and say, Dan, that our story is changing at more than a few years frequency that much that there's something that's probably going wrong. We're pretty long term, as you know.

Dan Ferris:                 Yes, very long term.

Brian Dalton:             The [crosstalk] should be just fine. No problem.

Dan Ferris:                 Yeah. OK, good. No, that's well said. I'm glad you said, made that point. Because as it says right in the stuff that you sent me yesterday about Altius, remaining royalty lives of the royalties that you're holding range from 19 to 163 years, average 43 years.

Brian Dalton:             That would only be on the reserves. If we wanted to talk about resources, some of those go into the thousands.

Dan Ferris:                 Right. I was going to mention that. Many hundreds of years and even over a thousand years. And all of those really super long-term ones are potash, right? There's nothing else in that category.

Brian Dalton:             Yeah. Not in the north of 100 years, the iron ore stuff would be getting close to that, some of the base metals, the potash is the, those things are just crazy.

Dan Ferris:                 All right. So, I do want to like just remind our listeners of what business you're in, really the two businesses, right? And maybe you could just give them a quick overview of that before we get going here.

Brian Dalton:             Yeah, sure. So, we are a royalty focused business with natural resources being what we like to accumulate royalties on, so natural resource projects. In some ways I could say it's two businesses, but I – more and more feel like it's one. We are focused on commodities, if you will, that include, agricultural fertilizers like potash, base metals like copper, a particular type of iron ore. And what I was just referencing then there, the other commodity, if you will, that we're invested in more recently is electricity. So yeah, top-line exposures, we really look for long project lives as a predictor of future option value realization.

There's a component of our business that I think is a bit unique amongst the natural resource royalty companies in that we also run an exploration business whose purpose is to identify potential new projects and then affirm them on to more operator types to retain royalty. So, we're just, we're not just buying royalties from existing producers and operators. In some cases, we managed to create them as well. And another differentiator I guess against most of the mining focused or commodities focused royalty companies that people would know is that we are generally not, or have not been focused on the precious metal side of the spectrum, just because we felt that area has been very well served and perhaps a little too competitive for us to really do what we like to do. And maybe another way of putting it, is that because we're more focused on the base and bulks and now electricity, we don't enjoy the same relative cost of capital that the precious metals royalty companies.

Dan Ferris:                 And I'll put it in an even different way, maybe a different way to say it is that companies like Franco Nevada, or Royal Gold or whoever, their stock, people love gold royalties so much that they can sell stock at a premium and buy royalties with it. And you can't buy those royalties if they're any good at all for less than, whatever exorbitant price they go for lately. So, if you don't have that cost of capital advantage, it's hard to do.

Brian Dalton:             No, it's just, you're not serving your shareholders well by even trying in some cases. That said, we don't shy away from precious metals when it comes to that part of our business where we explore and self-generate royalties. And that funny enough, this, pretty avowed nonprecious metals royalty company finds itself today with a royalty on probably the biggest gold discovery in the world in the generation, but that's another story, but yeah, we'll take it.

Dan Ferris:                 Yeah. OK. Maybe that's a story worth getting into before we talk about all the other things that you do.

Brian Dalton:             Yeah. A number of years ago, we acquired a company called Calinan Royalties. They had a big base metal mine royalty up in Manitoba in Canada, but it had other things as well. And they had a similar business strategy to Altius in terms of carrying out exploration or funding exploration groups in exchange for royalties for a grub staking model, if you will, fairly high risk. Long-term focus, but obviously would command certain reward when things worked out. And when we acquired them, we accumulated a number of royalties of that type, long-dated options, if you will. And so, yeah, one of those came in recently.

So, one of the groups that they grub stake farmed out a project in Nevada to Anglo Gold Ashanti who have gone on to make truly incredible gold discovery. And we have a 1.5% royalty on that project that stems from that original grub stake. And just to put that in context, the grub stake dollar amount if I recall correctly was $300,000. And now you can do some math in your head. I won't try to do it here, but we own more than a half percent of some, at least 13 million ounces of gold and probably a lot more. So, it's been pretty fun and exciting and great validation, I think overall of that prospect or royalty creation part of the business model.

And a lot of people, I think have a lot of trouble getting their heads around. They want to value what they can value today in terms of cash flows, but the option value that's inherent in some of these types of assets, and even some of the existing cash flowing assets, I think it's really important for anyone who's looking at the royalty sector to understand that is the real beauty of royalties. It's that potential for free- to low-cost option value realization. This is going to stand out as one of the great examples of that for a long time across the whole sector, I think.

Dan Ferris:                 Nice. Yeah. That's the venture capital end of the mining world, isn't it? It's you take a lot of little – Lawrence Winter from Altius taught me some years ago, he said, "Look, the way to do prospect generation is, you get the project, you find the partner, you move on, and you just keep rinsing and repeating." He says, "Beware, Dan, when you go to these mining conferences, somebody says, 'We're a prospect generator, and this is our flagship project.' That's a red flag. There should be no flagship project. They just keep rinsing and repeating and doing the little things, and one of them will hit eventually if you're doing it well."

Brian Dalton:             Yeah. If you're trying to, those are in members, of how the exploration models, it's prospect generation, or it's zoning on a high potential target and really go after that and try to turn it into a mine, and I find that if you try to go somewhere in the middle of that, it's usually you're setting yourself up for not good outcomes. So, pick one or the other and get good at it.

Dan Ferris:                 Yep. Well, we know which one you guys are good at. I remember not too many years ago you had something like was it two million acres? It was two million hectares, wasn't it? Of projects out there. And I thought, wow, that's the way to do it. That has to be the way to do it.

Brian Dalton:             Yeah. Look, there might be on a grand total at that time, there might be a grand total of five hectares of that actually contains ore, but that's enough. That's enough. And the question is how much do we have to spend to find that versus how much others will spend on our behalf? Because if that number is zero, it doesn't much matter, or close to zero. If it really doesn't matter, our margin on that success is unlimited in either case.

Dan Ferris:                 And just to give our listeners an example, like at the other end of this are investors who buy companies that do this. And we've had Rick Rule in the program over the past several years, a few times, and he once told me, I remember one of his partnerships. It was like a 10-year deal, and the compounding was insane, like 55% per annum for 10. It's just insane returns. And he said, "Yeah, I think I had 110 bets and like five of them really made the whole return." That's what we're looking at here.

Brian Dalton:             That's right.

Corey McLaughlin:    Brian, just quick, I want to ask you about how'd you get into this to begin with? It was decades ago, but we see beautiful backdrop behind you, Canada, and a beautiful part of the country. So, have you always – was this through family, or how do you get interested? Is there any history there?

Brian Dalton:             The Atlantic ocean behind me here. I'm in a place called Quidi Vidi, Newfoundland right now. Take my kids and we catch codfish and bluefin tuna just out behind me here. But I was meant to be a fisherman. So, when I was in high school, I'd actually bought a boat and started and get started a fishing enterprise. And that's what I was going to do... and absolutely loved it. But then there was a commercial cod fishing moratorium that was declared just as I was getting started. And so, I was very I guess abruptly booted from my chosen profession and had to find something else to do.

And I knew it was going to be outdoors focused. And so, I went to a university here in Newfoundland and began to study geology, became a bit of a prospector, I guess as I was in my studies, really as a means to funding my education. So, I was out looking for projects and farming them out while I was still in university. So, there was the beginnings of my project prospect generation roots. But the thing that I would say that happened that really changed trajectory of things for me was that there was a major discovery made at a place called Boise Bay in our home province. And that attracted literally hundreds of junior companies to come in wanting lands in and around that discovery.

We were there kind of on the ground. We'd actually built up some contacts because we've been out trying to sell projects up to that point. And we got very heavily involved with acquiring lands and selling them on to different junior companies while, this would have been like second and third year university, and got a real taste for the capital markets and the junior markets and probably got a sense from some of the groups that we dealt with that, that guy can do it, we can probably do it. There was a little bit of intimidation faded away and certainly we made some money. So, we just looked at ourselves and said, "Hey, if not now, when?"

Because it would be a natural tendency to think even if you were entrepreneurially inclined would be, I'll get some experience and down the road I'll try this, but we just went for it. So Altius was actually listed in 1997, so I was spending all day dealing with bankers and lawyers trying to get the company listed, and at night I was writing my honors thesis. I never actually graduated. I'm a couple of electives short, but yeah, so it was just weird confluence of events. And so, I've been CEO of this company now for almost 30 years. Long answer to what was meant to be a short question I know, but…

Corey McLaughlin:    No, that was great. Because I imagine when you're talking about prospecting and how you're going to hit on, I don't know what number. I imagine starting out, it's not easy -

Brian Dalton:             You find an interesting prospect and you'd hope that you can stake the claims, and you'd hope you could sell it back then for maybe get an option payment for a few thousand dollars. And there you go, there's your rent and tuition, at least in '97 or '95, it was. But it was also a pressure, right? Because you had to find something, you had to find something,

Dan Ferris:                 I worked in an ice cream store in college, and I worked in the library for a little while, a little bit of a different experience. I worked at a library, and now I'm a writer.

Brian Dalton:             Oh, there you go.

Corey McLaughlin:    I did work on a boat. I did work on a ferry boat, not a fishing boat.

Dan Ferris:                 Brian, let's talk about, I do want to talk about renewable energy. Do you want to do that now? That's an interesting thing to me that you've gotten into and the way you got into it too.

Corey McLaughlin:    Yeah, the electricity.

Dan Ferris:                 The way you got into it, I think it was brilliant, too. Maybe we should start there.

Brian Dalton:             I wouldn't necessarily use the word "brilliant." I would say we saved our asses basically through the electricity side, from adversity as they say, right? The backstory here is that it was back in 2013 when the potash royalty portfolio became available, and this is something we'd had our eyes on for quite some time. And the thing about the sale, though, it was coming out of a company that owned potash royalties, but also a bunch of coal royalties based in Alberta. So, these would be basically coal mines that were directly linked to power plants around Alberta. So, it was a package deal.

So, we bought the potash and the coal together, but within a few years, the coal royalties were basically made subject to a regulatory close out plan. When we'd acquired them, they were meant to be run, say, till the 2050s based on resources. But now here they were getting shut down by no later than 2030, and they didn't even make it that far, quite frankly. So, quite a blow to us and our business at that time, no real way to – we weren't going to get back what we'd invested in, at least in the coal world. The potash we knew was going to be fine for us.

But at the time, part of what we saw happening around us was that overall, there was a real shift in market share that was being signaled that the amount of power electricity that was going to come from coal on the grid was losing ground fast and renewables on the other hand were really looking to gain ground fast. This would run right around a time when the cost to levelize cost of generating power from wind and solar really started to drop into a zone that was more commercially attractive. So, we decided to make that pivot, and the decision was to take whatever remaining coal revenues were to come because this was a phaseout schedule and to try to reinvest it into the creation of a business that would write royalties on renewable-energy projects, and it was a bit of a novel idea.

I think we were actually pretty surprised to discover that it didn't really exist at that point because when you think about the other natural resource sectors, oil and gas or mining generally, royalties were fairly well established. Wind and solar – just other natural resources we were kind of surprised to see that it hadn't made it there yet. A bit of a leap of faith and a bit of work really to convince the players in the space to consider royalty financing as part of the capital stacks for the projects that they were putting together. But fast forward a few years, back then, the first investment we made was really to acquire a team of people that knew a lot more about renewable energy than we did.

It was a $5 million USD investment to acquire their business, which came with a couple of small royalties, a small hydro royalty and geothermal royalty. The first investment here would have been $5 million USD to buy two small royalties in the northeast. And if I can really fast forward, we recently closed the transaction that brought in a private equity investor into the business, but really, they're acting for big European pension money and some big U.S. family office money.

And that same business, if you look at the valuation that's implied through their entry price would be somewhere north of, or getting close to $600 million USD. So, that was only 2019. To say that the royalty model has been successfully brought to the renewable industry space, I think, is a very fair statement, right?

Dan Ferris:                 It seems like it. So, I have here it says 13 renewable-energy royalties in production. Is that the right number?

Brian Dalton:             That sounds about right. A lot of the earlier investments we made in the early years of the business were into what we call development stage platform. So, groups that had a lot of projects that they were trying to advance, and they were probably acting almost more like prospect generators themselves because they would advance them to the point that they were ready to build and then sell them on to others. So, a lot of the investments were at that stage and big, big portfolios. Enough time has passed now that we're starting to get a really steady flow of those projects coming out the back end of pipeline.

So, there's more being added to the producing side of the portfolio pretty steadily. And over time, we've also been able to make acquisitions into later stage and operating stage projects. There's a mixed bag. There's, again, that many that are operating, but if we didn't do another thing from here, that number will just steadily grow for the next several years. Go to the sites and look at these things being constructed all over.

Dan Ferris:                 And these are royalties on what, solar, wind and hydro, you said?

Brian Dalton:             The hydro was a small, almost a legacy scale asset. There aren't a lot of new hydro development opportunities out there. We'd love to be involved with more hydro. It's just that, for the most part, let's just call it like it is, the hydro development that's going to take place in the U.S. is probably pretty much taking place. So, it's basically wind and solar and increasingly each of those with big storage components. There are not very many renewable-energy projects currently being advanced or proposed that don't have associated storage attached to them.

Now, that's a bit of a function of battery costs have really come down and technologies have really improved in the past couple of years. That's going to go a long ways, I think, to solving the whole intermittency issue with renewable power as we go forward, and it's not speculation. It is absolutely happening again. There are almost no projects right now being advanced that don't have at least 8-, 10-, 12- hour storage capacity attached.

Dan Ferris:                 OK, but does your royalty involve storage in any way? Or is it just on the amount of power generated?

Brian Dalton:             It would. So, it's still the same as – it's price times volume. So, to the extent that storage can impact the ultimately received price, that's, of course, its sole purpose. So, yeah, we do collect that. Like the differences between those royalties and say, the mining royalties, in the case of the mining royalties, we can actually register a royalty title against the mineral interests. So, it's a more of a registration right on title, and we still haven't found the registry that lets us stick title on wind and sun rays, but we can attach it to the footprint of the sites. And so, that's how we've done it.

And the other linkage, I suppose long term, when we think about optionality – well, first and foremost, these resources, notionally anyway, never expire. If they do, we're all in big trouble. So, the potential for these projects to be continuously invested in essentially forever and continuously the equipment continuously replaced is pretty good, I would say, because the resources is there. The thing here is that we're basically usually underwriting our royalty investments on the basis of the initial project life, so probably the rated life of the equipment, and we're generating our returns on the basis of that time frame. But in reality, we believe that all of these projects will continue on and on and on, and all of that will ultimately serve to boost returns for us.

Not only that, when you think it out, say it's a set of wind turbines today and they're only good for 20 years. So, we've assumed 20 years revenue, but if that gets reinvested in 16 or 17 years, suddenly there's an extra 20 years. The terminal value is not zero anymore. Now there's a whole 20 more years of revenue to come. That's one side of it. You've also got to think forward to at that point in time, what will have happened to the equipment?

Like the equipment that we'll be replacing what's coming off probably is capable of capturing more energy from the same footprint and the initial round. So, you're going to get a volume increase and a life extension all at once, all at no cost. So, yeah, in some ways it almost has features that make us think like we do about our potash royalties that no matter how many times you expand them, it doesn't seem to have any impact on the resource life, because for all intents and purposes, it's infinite.

Dan Ferris:                 Right. I love the potash because it's just it's amazing to me that with a mineable resource, right? You're extracting this thing out of the ground, but there's so much of it that you can actually expand the production. You can grow the business. It's incredible. And Altius doesn't pay anything more for that, but they certainly make more off of it. So, it's a beautiful thing, as you've pointed out many times to me.

Brian Dalton:             When we bought those, so it's only 10 years ago, the mine operators would have been producing somewhere, I'm going to say around 9 million tons a year of potash. And with no fanfare, just feeding into global demand growth, that's expanded to something like 15 million tons right now. So, no big splashy announcements or anything else, but just a little bit of increment, like the potash global demand grows at about 2.5% a year. And you can almost set your clock. There's volatility year to year, of course, but that trend line is just what it is. It's about the number of people you have and how much food you need to eat. They're essentially proxies for royalties on food, in the most general use of the word food.

So, I don't expect that demand growth to go away, and I don't expect these operators to keep incrementally expanding their production to hold, if not grow their market share. So that's pretty wonderful. But what's typically in a mine, let's say it's a 20-year mine life and you produce at a certain rate, if you decide you want to double your production rate, you've halved your mining. And that's certainly true in potash. In the end, it's still going to be a finite resource. But when you're talking about doubling your production to half your resource life from 2,000 years to 1,000 years, I don't think the tail end of your discounted cash flow model really gives a sh** about that.

Dan Ferris:                 Yeah, no, it does not. That's right. Point well taken. And when you started, when you bought these, those mines had a, what is it, a 17% global market share. Now they have 21%, which is really cool.

Brian Dalton:             Yeah, so you've got a steadily growing market, and you've got assets that are earning market share within a growing market. When you've got compounding growth and you're earning extra market share together, it's pretty magical stuff. But from year to year, the volatility and price and everything else from year to year clouds that, I think, to a lot of people, but it's never lost on us. We all, again, we lose a lot of people when we start talking about potash. So, a lot of people are thinking in terms of the next quarter. When we're talking about the next quarter century, right? Nothing else really matters. That's disconnected.

Dan Ferris:                 I like that, quarter, quarter century. So, I want to pivot to copper because you mentioned the demand curve that ongoing 2.5% for the growth and demand of potash. Copper is similar over the long term, isn't it?

Brian Dalton:             Absolutely. It's pretty crazy sometimes when I listen to the narratives that are out there all the time, right? It's all construction is down in China. Demand is going to get crushed, or energy transition is going to drive demand to the moon. And this becomes the narrative, and everyone gets on it. And it's just so much noise. Guys, just look at it long term chart. We as a pop, as this is essential stuff, we use about 2.5% more on average every year with a little bit of volatility and why you beat your brain up, like dealing with all that sort of stuff? And then you almost get the competing woke versus anti-woke arguments, and it's just really noise. Like a lot of people, I think, make the mistake of getting lost in the trees when the forest is just so obvious and clear.

Dan Ferris:                 Yeah, and this is worth pointing out to our listeners. This view, the understanding of the constant demand over time, I also have heard oil investors talk the same way and the narratives around oil are all the same way. A good oil investor just says, "Let the market correct so I can buy more." That's all. That's it. And it's the same with these other things.

Corey McLaughlin:    Right. And the lack of investment in supply over time, right?

Dan Ferris:                 Yep.

Brian Dalton:             Look, I'm not saying the short term doesn't matter. Obviously, lots of people want to trade those short-term swings, and maybe it is because some demand got crushed or appeared out of nowhere and all that sort of thing. So, I'm not trying to be too harsh, but you got to think about how Altius plays in the copper market. We're going to buy a royalty on an asset that might take years to come to production, and then it's a story that's going to play out over 20 or 25 years. And I can't trade in and out of the investments, right? So, I've got to have views on the big – that are from the big picture. But what I do feel clear in saying this is that all the noise is around the demand side of the story, right?

Everyone gets so caught up in these short-term predictions and whatever. That's not what drives the price cycles. And the price cycle is really critical here, because that's how a contrarian can operate. The boring trajectory of copper demand growth is not that exciting, quite frankly, because it's just steady. But it is exciting when you realize that even with that steadiness, the price goes all over the place in regular intervals. And you can really take advantage of that volatility, if you will, as a contrarian. It's the supply. It's the response to the prices and whether if the prices are high relative to what's needed for people to look at a project and say, I can make money on this at that price, I'm going to invest that money.

Well, enough people do that all of a sudden, guess what? You're going to have too much of it and the price is going to crash and then that'll have the self-correct and not enough will happen because the price is too low and next thing you know, you've got a big shortage and the price goes bonk. So, it's in between of that is where all the real beauty and joy is. I listened to one of your guests, a recent one who was talking about long term approaches and investment, and I thought it was fascinating. I thought his stuff was really good. The only thing that I was – he made the specific point that he doesn't like to invest in things that are cyclical. I share his long-term sentiment, but I love cycles, and I love how irrational they can be.

Dan Ferris:                 Yeah, you guys have done a great job of sort of riding the cycles. And I can remember Chad Wells from Altius and I having a conversation one time when he was telling me he was getting a little impatient. And then he mentioned you and he said, "But like Brian says, don't worry." Talking about the market for commodities and specifically mine commodities, the stuff you go after. You had said, don't worry, she'll turn, she'll turn, meaning the cycle will turn. We will get our opportunity. It's guaranteed. It's just the way it works. So, if you can be that patient, yeah, you can make money.

Brian Dalton:             Or if they're caught up in some narrative that really doesn't matter, and they're, the bears are all over some narrative and they create an opportunity. So, there's the bigger cycles, like true supply-and-demand-driven cycles, which are functions of responses to price, quite frankly. But even within that, there can be shorter-term ones, but you've got to remember the key here if you're thinking about how we play, we're not even trading copper every day. We're literally looking for good assets that can survive through the cycle, and that will deliver optionality, particularly on the good parts of the cycle.

And when we make our selections, we're with them, like we're not getting up in the morning and saying we should trade out of that. And maybe it's good that we can't even, if we wanted to. But quite frankly, we're evaluating these investments literally in decadelong timeframes.

Dan Ferris:                 That's so cool. That's awesome.

Brian Dalton:             It's a lot easier to get all bent out of shape about whether or not EV penetration is going to be 11.1% or 11.3% this year. But broadly [inaudible] Dan, I would say it's actually simple, like why the steady demand growth has been there. You can go back 100, 125 years and see that same compounding rate. It matches up with something, and it's really not that complicated. Copper is electricity. That's its role. Copper basically facilitates humanity's use of electricity. So, electrification, I'm almost afraid to say the word now because it's like I'm gonna get all the anti-woke crowd upset. I'm sorry. It's been something that's been going on since, whatever, late 1800s.

So, call me woke if you want to, but I love copper for its electrification applications, but that's 70%, 80% of copper use. So, we continuously across the globe use more and more electricity every year. There are still loads of people not connected to grids, so you've got that constant demand driver because everyone who doesn't have it wants it and they're going to get it and we just seem to find more and more applications for it, just more of the machines and everything that we use. If you can find a way to power that with electricity, for the most part, you're going to try to do that because it's just such a convenient steady form of energy. It's good stuff, and it's probably not going to go out of fashion any more than food will.

Dan Ferris:                 Right. Well said.

Corey McLaughlin:    Or the sun, right?

Dan Ferris:                 Sun's going to be with us for a while. I want to tell our listeners about the discussion we were having before we hit the record button. You had put some work in a slide presentation a few years ago and showed it to me, and it was about the incentivization price for copper, which I believe at the time he said it was around $5 a pound, but you pointed out that over time, it's been true that twice the incentivization price is needed before the capital really starts to move in and moves that supply response that you were just talking about. And this is something I've quoted you a couple of times on this and a couple of presentations, because it really speaks to human nature and the way these cycles go and the way we're talking about people invest in them when they're doing it right.

Because we all know that humans aren't robots. They don't say, "Oh, the $5-per-pound incentivization price has been reached. I will now invest in copper." No. They wait until their neighbor doubles his money, and then you know what they do? They say, "I'm going to wait," and then they wait till he triples it and then quadruples it. And then they all pour in.

Brian Dalton:             It's actually simple, right? If you think about a mining company who has a project and they've been evaluating it, they have an estimate how much it's going to cost to build. They know how much it's going to cost to run. The big variable is going to be the price. So, is the price going to be high enough to generate enough margin for me to cover operating costs first and pay back all the money I spent on it? And they're obviously going to want to see a return on that. So, when we calculate incentivization, that's what we do. We solve for the price that's required to make that a reasonable return.

I think we use 15% as our standard, and back then it would have been around $5 a pound. That was what the answer was. But what manager is going to go to a board and say, "Look, the price just hit $5. That's the number we need to make this project work." Well, it just met $5 having come from $3 or $4. So, everyone's going to be thinking, oh, $5 feels aggressive. What happens if it goes back to $4? We don't make a return, but we can't do that then. No, not there. We don't trust this price at that point because it's been lower for the whole period previous. Once that price gets up to $6 and $7 and it's held in there for a year or two, $5 starts to become a lot more believable and then enough courage is mustered to make the investment decision.

So, even after you hit the incentive price, you typically have to well exceed it before you actually get the supply response. And that's obviously a decision by whoever has to make it to invest all of that money. They aren't going to make it the minute that the price hits that number, right? They won't believe it. So, that's what we track incentivization against price. We can show you the points in time where that's when the cycle, the price cross incentivization, that's the beginning of an up cycle. And then you track when money started to flow and there's always a year, year and a half lag, and the same thing for it to turn off. It doesn't turn off the minute prices go below incentivization. I think that's probably just more of a function of, it's hard to stop big ships.

Dan Ferris:                 Right, the capital gets committed. And if the price gets knocked from $10 to $7, well, we're committed, so $7 is still pretty good. Yep. That's right. And eventually –

Brian Dalton:             Oh, sorry.

Dan Ferris:                 No, go ahead, go ahead.

Brian Dalton:             The update to that is that it's not $5 anymore. It crossed $6 this year. So, the capital cost for the last couple of years have been the big driver in that in that model, just the capital intensity to build new mines has been steadily up. We don't have fully accurate data on that. I think we might actually be a little understated in saying it crossed $6. I think we're a little short, but just go with that. The big driver this year that's caught a lot of people out is operating costs have really taken off. So operating costs per unit of production globally have really started to jump up a bit now. It's just unrelenting, right?

Like it's unrelenting and you think, if you go back to 2000, that incentive price was somewhere around a dollar. And if you had told someone that in 25 short years, so the life, within the life of a project, that the copper price will be bouncing around between say high threes and high fours. They would've thought that, man, it's going to be so great when we finally get to there. And the reality is we've gotten here, and you've got those prices, and percentage margins are actually lower than they were back when the incentive price was a dollar, right?

So, costs have been steadily rising for 20, 25 years, and they will continue to because the next generation of war bodies that are available to be developed are inferior to the last ones. They're lower grades. 10 or 15 years, you have to move twice as much rock right now to get the same unit of copper as you used to have to. That's all cost. There's twice as much water and power that's required. It all incrementally builds in and the next generation that's available today, so when we get incentivization – we will, and we will get a whole bunch of mines that will get built. It's just the way it is. They will be structurally inferior to the ones that were built in, say, 2007 to 2012. They have a higher embedded cost structure attached to them.

And that will go on and on and on. There aren't going to be a bunch of surprise new high-grade copper discoveries found at surface now. We're talking about choosing to pick lower-grade deposits because that's what's available to us. These wouldn't have made the cut 15 or 20 years ago, but they're the best we've got right now, and we still need copper. Listen, the key here, key bring home point for this is it might sound gloomy if you're investing in copper miners, is that gee, the margin, you get more price, but your margin shrinks.

What's going on here? The answer to that is pretty straightforward. Why don't you buy an exposure that is fully exposed to the increased price, but attracts no share of the higher operating and capital costs? And I'm pretty sure that's called the top line royalty.

Dan Ferris:                 Gosh, if only there were a company that focused on [crosstalk] investing.

Brian Dalton:             I feel like I got tossed a pretty soft pitch there, but I'll take it.

Corey McLaughlin:    That's the point, right?

Dan Ferris:                 Look, I admit to tossing soft pitches. I have no problem doing it because on the podcast I don't want to be too flimsy, but I want all of our guests, you and all of our guests to play from strength, like I want you to think everything is a soft pitch. I want you to lean into it and whack the crap out of it and show our listeners what you're doing and why it's good. This is not going to be like – I'm not going to be getting into debates with my guests, put it that way.

Corey McLaughlin:    Just me sometimes.

Dan Ferris:                 That's right. I'll get into debates with Corey. I'll take it out on him.

Corey McLaughlin:    I'm curious, just going back to –

Brian Dalton:             Sorry, Corey. Dan had mentioned a couple of my colleagues, Chad and Lawrence. We're having a friendly banter here. They don't always get the same friendly banter, but we have really good fun debates.

Corey McLaughlin:    Yeah, that's good. I'm curious, just going back to the electricity for a moment, and you mentioned wind, solar is what you're mostly involved in there. There's a lot of discussion now about nuclear and with respect to all kinds of things, but artificial intelligence and the demand and all the big tech companies here recognizing that, are you interested in that at all? Is there a way for you guys to be in that? What does that look like?

Brian Dalton:             Look, I'm definitely a believer that nuclear has a serious role to play. Quite frankly, going forward, particularly for you guys in the U.S. right now, you've got a real big surge in electricity demand on your doorstep right now that could be a real problem. I don't think nuclear is going to be available to solve for this wave of it, but longer term, you start compounding big numbers, you're just going to need more and more power. So, I think there's room for more nuclear, there's room for more natural gas right now, there's room for more renewables developments. I don't know if coal is going to pass muster anymore, but there's definitely room and nuclear has, I think it's got a great future, but it's always going to be longer dated, right?

And you had to be careful too around, it's hard to imagine something with bigger NIMBY challenges. You might be philosophically really excited about the idea of the U.S. adding a whole bunch more nuclear capacity, but not necessarily in the field over behind your house. But that's a feature of all of it. That's a feature of renewables for that matter. Nuclear has its own dynamics. And I think just, and rightly so the whole regulatory safety level of scrutiny is just more, it's just going to take longer and be more rigorous.

So, you're not just going to, you see an announcement that whichever tech company is investing in trying to restart a nuclear plant or build a nuclear plant, they're not investing for their data-center demand next month with that. They're thinking probably 10 or more years out, but I really do believe that nuclear's like share of the total electricity market has – I'll use the U.S. again as an example – has been really flat. It just hasn't been much new development in a very long time. All of the market share gains have come from natural gas and from renewables. I think nuclear really is – give me a 20-year horizon, and I look forward to that. I can see nuclear going through a period here where it really gains back some of the market share that I wouldn't say it lost, but that it didn't participate in.

And how we might play that would be mostly through, and I don't think our capital is in the scale that we're at is going to end up being part of the capital stack for the building of a new nuclear plant. I don't think we'd even, what we could provide I don't even think it would pay for the first page first series of documents that would get filed let alone construction. But we can participate through the inputs so the uranium mining side of things. So, in the past, we've actually had pretty big exposure, maybe exposure is the wrong word to use when you're talking about uranium, but we've been involved with uranium and made quite a lot of money on it. That sort of big price spike that we saw in the mid-2000s. In fact, I can tell that story if you want it because it's a pretty important part of our overall history.

Dan Ferris:                 Oh, I was gonna say uranium put you guys on the map, didn't it?

Brian Dalton:             We found this project. To be fully honest, we were looking for copper. We knew there was some uranium around, again, full disclosure, if you look at our early marketing materials in that project, we would've been almost hiding the fact that there was uranium there and playing up that there was a copper prospect, and before too long, though, uranium suddenly got a bid and we shook ourselves and said, guys, we got to stop trying to make this uranium mine a copper mine and went to work and we showed some, didn't spend a lot of money with a half million dollars or so. And the resource really grew, and the market was just right.

So,  company bought that, went public. We took back shares and a royalty in exchange for the project. And that $600,000 investment at the project level within a few years was suddenly more than $200 million worth of shares in our account which we did sell, retain the royalty. But that money, so we had all this big capital gain. I mean our market cap when we listed ten years previously was under $1 million. Now we had $200 million in profit sitting in the bank from some exploration work. And that in our history was a really important point because it was a problem in that what do you do with that much cash?

How do you move the needle when our business model is about spending as little as we can, and you know getting these high impact bets? One thing we really thought about, to be honest was dividending out all of that profit and shrinking the business back to the point that the exploration stories could make an impact again. In the end though, we decided to start buying up royalties. So that was the moment that we decided we would become a more instead of just generating royalties from exploration, we would now buy royalties on a more advanced stage project. And yeah, so that was kind of the moment where we really set the path to that our focus would be a nonprecious metals royalty company.

The problem was when we got the money, all the commodities were rocking. This was a becoming widespread. Now copper was flying, iron ore was flying, potash was flying. We wanted to buy royalties on those kinds of things, but we just couldn't bring ourselves to pay the prices for the royalties because you were at such crazy points in the price cycles.

So, that kicked off maybe one of the most difficult periods we've ever gone through, because we had to basically choose to almost do nothing for five years on old cycle rolled over and that we did, but when we bought the potash royalties, the cash, like the equity part of that investment was from the original $600,000 uranium investment. So, to say we might have a soft spot and a fondness for uranium would not be an understatement. And would we [crosstalk] right now if a good project was around, mine development project was around that we could invest to own a long-term interest, royalty interest in that, we'd be more than open to that.

Dan Ferris:                 All right. Yeah. I love uranium as well. We've talked about uranium and renewables. Actually, maybe we should talk a little bit about how you run the company and how you make decisions because you pay dividends, and you buy back stock, and those things are important to shareholders. We probably have shareholders listening and potential shareholders, certainly.

So, maybe we ought to spend a little bit of time talking about how you make those decisions, because the dividend has, it was a few million bucks and now it's pretty substantial. And I feel like there's a great long-term runway here and you're paying back more to shareholders than ever, it seems the last couple of years here. How do you think about that? How do you make those decisions?

Brian Dalton:             You're going to capital allocation really. And I think most people would lump buybacks and dividends into the same kind of returns of capital category. And I'm not saying that's wrong, but it's not how we think about, those are pretty separate things. The dividend no doubt is an absolute return of capital, but when we're making decisions to allocate capital towards our buyback, it's solely on the basis of, I'll put it a different way. We look at it as a competitive with sort of M&A-type investing. It would, the buyback, the returns we sense we're getting through the buybacks. When we look at the value of our assets, including our own views on what the option value realization will be over time, and we were presented with a price on any given day.

We're looking at well, how attractive is that? And it has to compete with maybe any external investment opportunities that we've got. So, there's an opportunity to buy royalty on a mine over here and that's what I believe its quality and returns look like. So again, the buyback for us is going to be more like M&A. It's us saying that the best value we see in the market right now to grow value for our shareholders is in buying more fractional ownership interest in the assets that we already own versus going out to try to buy something external, right?

So, that's the trading that's going on. So, we'll get more constructive, obviously, when we think that the spread between our view of the value of our assets and the share prices is why it is. We're not trying to dollar cost average that buyback out over time. So, that's the discipline.

Dan Ferris:                 You sound like Warren Buffett, Brian.

Brian Dalton:             It really is basic stuff. I think there's always a natural bias in management teams to buy something external, right? To make it an acquisition, to add something new. But on a per share basis, unless you're adding to quality is one other feature I would add to that, but it has to be a, if you like the things you've already bought and you must have because you bought them and you think you're trading at a deep discount, on a per-share basis, you've got cash sitting around, heck, buy more of it, right? You're not buying more of it, but you're buying more on a per-share basis.

And so, I think that's the message. It might make more headlines if you're buying something external and you're adding to the overall size of your portfolio or adding to your overall market cap. But why solve for that? You're solving for one thing. You have one job, like you're trying to grow value per share. And sometimes, and oftentimes, in fact, and regularly, it's literally sitting in your own portfolio, right?

Dan Ferris:                 So, contrast that with the dividend policy, which is different.

Brian Dalton:             So, the dividends, that's – I'm a big shareholder of the company. There's lots of long-term shareholders in the company. One of the things I like about the dividend and an objective of a continuously increasing dividend is it imparts a certain discipline. When you set that goal for yourself to continuously add more to increase it, like we don't pay an incredibly high dividend amount as a function of cashflow, but it's steadily increasing, and we have to make real calls about the status of our business. We have to think about that when we're making external investments. Is that an investment that supports our objective of an increasing dividend?

I know some people really like dividends, like I find, for example, in Europe, UK investors, they're much more inclined towards them. In North America, we often get pushed back because they're not very tax efficient and those kinds of things. So, we don't go crazy with it, but I won't lie and say that last year we were included in the TSX, or Toronto Stock Exchange, dividend aristocrats index, which is whatever, however many years of continuously growing dividends. And I didn't feel bad. But look, per share, that's another form of return. And they own away. You've got that one.

Dan Ferris:                 I see. When you said "discipline," I smiled because from the outside looking in, I like the discipline of most companies like they do what they do, and like you said, they tend to want to expand the empire and do external M&A rather than buy back the shares or whatever. But the dividend actually imposes a kind of discipline on them, and it takes the capital out of their hands and forces them to use the remainder as efficiently as possible.

Corey McLaughlin:    That's what you want to hear as a long-term investor from the outside.

Dan Ferris:                 Yeah, exactly. So, I love that you're thinking about these things. I've known you for a long time, so I know you're thinking this way, but now I want our listeners to know it, too.

Brian Dalton:             I'm an owner. I'm not just CEO. I probably more identify as an owner of the business.

Dan Ferris:                 Yeah, well, you're the founder. This is your baby. Yeah. And you're still in that mode and you'll always be in that mode. It'll always be your baby. All right, I'll tell you what, let's go ahead and do our final question. It's the same for every guest. You've answered it before. And if you've already said the answer, feel free to repeat it. And the question is simple. If you could please leave our listeners with a single thought today, what would you like that to be?

Brian Dalton:             Can I direct it to a specific subset of your listeners who actually are long-term focused? I don't think I have a [crosstalk] a short-term focus, but it would be really just to stay looking at the forest and just declutter, get away from all that short-term noise. It just doesn't matter. Stand back, see the big picture, appreciate it. I don't think that's just true of investing. We're just so inundated these days. Appreciate the good things in your life, your family and all those kinds of things, just keep things big picture and simple. The stress we put on ourselves, agonizing over little things that don't matter, and all of us do.

Dan Ferris:                 I love that answer. We had a couple answers like that literally someone said a year or so, and it's appropriate.

Brian Dalton:             I'll show you something here.

Dan Ferris:                 Yeah. There you go. Focus on that. Stare at that.

Brian Dalton:             I want to say [inaudible] that I definitely think it's a benefit that as a group, we live and think from here instead of in a manic sort of big, financial center where everything's just so frenzied. This is a great place. And I know where you're to as well, Dan, it's just a great place to be able to think.

Dan Ferris:                 Yeah, it's a wonderful place. I've been up there at a time or two. It's beautiful and it's well off the beaten track. The first time I went to Newfoundland I thought hey, that's right over the way from New York. It shouldn't be very long at all. And I got on the plane from New York, and it was like hours. I was like, sh**. I couldn't believe it. I was like, oh wow. And I found out you're right at the Eastern most point of North America. They used to have a flight that went to London, and it was like four hours. It's out there.

Brian Dalton:             I love it.

Dan Ferris:                 All right. Thanks a lot, man. Look, I love talking to you. It's been way too long. I'm going to have to get back up to Newfoundland soon and visit. And thanks a lot for giving us your time and talking with us.

Brian Dalton:             It's been a lot of fun guys. I really mean it. Thank you.

Dan Ferris:                 You bet.

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Dan Ferris:                 It's a pleasure to speak with my old friend, Brian Dalton. I've known him many, many years. I've been writing about the company and our Extreme Value newsletter since 2009 continuously. It's always been in there. It's one of our longest held positions and our second longest held position in Extreme Value. And it's worked out well. It's a great business.

He's a great guy. He's a brilliant guy known throughout the industry as a really brilliant guy. And so, I love bringing him on the show. He and Rick Rule like between the two of them, that's how I know anything at all about natural resources. That's it right there. Brian Dalton, Rick Rule.

Corey McLaughlin:    Yeah. Listen to them two and be set pretty good, right? Yeah, I feel like I'm well educated, and I was not, I didn't know about the electrification angle that he got into as well that they have going on. So, that was interesting to hear, too, from – and even he brought it up, like he has to balance being involved in that versus whatever criticism you might get about being involved in it, but obviously sees the financial opportunity there as well. Makes sense for him and their company. So, yeah, it was great talking to him. I won't get tired of staring at the Atlantic ocean behind him either.

Dan Ferris:                 I know. Yeah. I thought that view, I thought that was actually St. John's, but it's not, it's another spot up on the coast there. But I've been to St. John's, and it's just a gorgeous, idyllic little town on the Atlantic coast. And Brian has a boat and we, when you go up there, one of the first things we do is head to the boat and go out and fish for cod right off, just right there, right in view of St. John's. It's a good time. Yeah. All right. That was another great interview with our old friend, Brian Dalton, and another episode of the Stansberry Investor Hour. I hope you enjoyed it as much as we did.

We do provide a transcript for every episode. Just go to www.investorhour.com. Click on the episode you want, scroll all the way down, click on the word "transcript" and enjoy. If you liked this episode and know anybody else who might like it, tell them to check it out on their podcast app or at investorhour.com please. And also, do me a favor. Subscribe to the show on iTunes, Google Play or wherever you listen to podcasts. And while you're there, help us grow with a rate and a review.

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